Find out 5 common myths about income tax. Learn the truth about
income tax so you don't make a costly mistake. Get tips to pay less income tax
and save more money.
Money Girl
198 MG Five Common Myths About Income Tax
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Hi, everyone, and welcome back to Money Girl's Quick and Dirty Tips for Richard Life. I'm Laura Adams. From now until the end of the year, I'm doing something special to thank you for being a part of the success of the Money Girl podcast. The show has been downloaded over 7 million times, so I'm giving away seven excellent personal finance books written by various authors. There will be one winner each week and all you have to do to be eligible to win is go to smartmoves2growrich.com and sign up. You can keep these books for yourself or turn them into very nice holiday gifts. Again, go to smartmoves2growrich.com and register to win 7 free personal finance books. Taxes are probably the most confusing topic in the world of personal finance. In my new book that's coming out next month, Money Girl's Smart Moves to Grow Rich, I cover everything you need to know to create a secure financial future, no matter how much or how little you have. Chapter 10 will help you make sense of taxes and teach you how to legally pay less. I boil it down to what you really need to know without trying to turn you into a tax accountant. You may wonder why you need to know anything at all about taxes. The reason is because many people pay more in taxes each year than they do for their mortgage or rent. That means falling prey to a common misconception about taxes could cost you a bundle. So let's start by busting five common myths about federal income tax. Income tax myth number one. The poor pay a bigger percentage of their income on taxes. In the United States, our income tax is called a marginal or progressive tax because it increases as you make more money. In other words, the more you earn, the more uncle Sam takes out of your wallet on a percentage basis. Someone who earns $100,000 shells out over 22% of their money for federal taxes on average, whereas someone who earns 30,000 only pays about 13%. That may still be a relatively large amount for someone who's struggling to make ends meet, but it's not a higher percentage of their total income. Income tax myth number two. Your tax bracket is the tax rate you pay. A tax bracket is a range of income that's taxed at a certain rate. Each bracket gets assigned a progressively higher rate, which means that the first dollars you earn are taxed the least and the last dollars you earn are taxed the most. There are six tax brackets for 2010, 10%, 15%, 25%, 28%, 33% and 35%. If you're in the 25% tax bracket, your entire income is not subject to 25% tax. That's just the highest rate that's applied to your top range of income. The actual amount of tax you pay can be used to calculate your effective or average tax rate, which is always lower than your tax bracket rate. Simply divide the amount of tax you pay by your income. For example, if you're a single taxpayer and make $35,000 in 2010, you're in the 25% tax bracket, but your effective tax rate is just 14%. At moneychimp.com, you can use the federal tax brackets calculator to find out how much tax you really pay based on your income and tax filing status. Income tax myth number three. If you get a raise that puts you in a higher tax bracket, you'll make less money. When you make more money and get bumped into a higher tax bracket, pat yourself on the back. As I mentioned, a higher bracket only increases the rate of tax that you pay on the last dollars you earn, not on your total income. So no matter your tax bracket, getting a raise always means that you take home more money. Here's an example. Let's say you're a single taxpayer who made $34,000 in 2009. That amount of income puts you in the 15% tax bracket, but you get a small raise in 2010 and will make $35,000 this year. You realize that the cutoff between the 15% bracket and the next highest 25% tax bracket is $34,000. So should you worry about getting bumped from the 15% bracket into the 25% bracket? Absolutely not. Here's why you should be thrilled to move into a higher tax bracket. Your income won't be taxed any differently, except for the amount that falls within the top 25% tax bracket, which is just $1,000. Again, the tax bracket cutoff is $34,000 and you're going to make $35,000. The last $1,000 you earn is the only amount that will be taxed at 25% instead of at 15%. So getting a $1,000 raise only costs you an extra $100 in taxes. That means your raise puts an extra $900 in your pocket after taxes. Income tax myth number four. Income taxes are higher now than ever. After investing billions to light up our network, T-Mobile is America's largest 5G network. Plus, right now, you can switch, keep your phone, and we'll pay it off up to $800. 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Credit Union of Colorado, honestly good. Learn more at honestlygood.org federally insured by NCUA. Taxfoundation.org has a great chart of the tax rates from 1913 through 2010. It's interesting to look back and see how much our tax system has changed over the years. For instance, in 1913, the top tax rate was 7%. But by the mid-1940s, it was 94%. As I mentioned for 2010, there are six tax brackets that go from 10% up to 35%. Income tax myth number 5. There's no way to lower your taxes. As complicated as taxes can be, there's no reason to pay more than you have to. In a recent podcast called How to Use Tax Shelters to Save Money, I gave you five legal ways to reduce your taxes. Here are three more tips for ways to pay less tax and save more money. Number 1. Deduct job hunting and relocation expenses When you're looking for a job in a similar trade or business, you can write off certain unreimbursed expenses, like headhunting fees and travel, even if you don't end up finding a job. 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I'm glad you're listening. To change, that's all for now. Care to see if money girl, your guide to a richer line. At Credit Union of Colorado, banking doesn't have to be like this. Big national banker here to let you know we are increasing fees. Again, now some people will say they are hidden fees, and if I had my choice, I'd hide them. But I guess that's not legal. So for now, please reference line 572 on page 36 for all new fees this month. At Credit Union of Colorado, we have better interest rates, seamless mobile banking, and no hidden fees. Ever. Credit Union of Colorado. Honestly, good. Learn more at honestlygood.org, federally insured by NCUA. Earning your degree online doesn't mean you have to go about it alone. At Capella University, we're here to support you when you're ready. 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